The Impact of Climate Financing by Pakistani Banks on Firm Value: An Empirical Analysis

Abstract

Climate change poses significant economic and financial risks for developing economies, particularly for climate-vulnerable countries such as Pakistan. In recent years, the Pakistani financial sector—led by commercial banks—has been encouraged by regulators to support climate mitigation and adaptation through green and sustainable financing instruments. Despite these policy efforts, climate financing remains a relatively small portion of total bank lending, and its economic benefits for firms are not yet well understood. This study empirically examines the impact of climate financing by Pakistani banks on firm value, with a specific focus on publicly listed firms in Pakistan. Using a quantitative research design, the study analyzes panel data from scheduled commercial banks and non-financial firms listed on the Pakistan Stock Exchange over the period 2015–2024. Climate financing is measured through bank-level exposure to green and sustainability-related lending, while firm value is captured using both market-based and accounting-based indicators, including Tobin’s Q, Return on Assets (ROA), and Return on Equity (ROE). Panel regression techniques are employed to assess the relationship between climate financing and firm value, while controlling for firm-specific and macroeconomic factors. The study also evaluates the moderating role of bank size and the quality of Environmental, Social, and Governance (ESG) policies. The findings provide empirical evidence that climate financing has a positive and statistically significant impact on firm value in Pakistan. Firms associated with banks that actively engage in green lending exhibit stronger financial performance and higher market valuation. Moreover, the results indicate that the positive effect of climate financing is stronger when supported by larger banks and robust ESG frameworks. These outcomes suggest that climate finance not only supports environmental objectives but also contributes to shareholder value creation. The study offers important policy implications for regulators, banks, and investors by highlighting the need to scale up green banking initiatives, strengthen ESG integration, and position climate finance as a strategic component of Pakistan’s sustainable economic developmen